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Economics Year 2 > 3.1.1 Business Growth > Flashcards

3.1.1 Business Growth Flashcards

1
Q

7 reasons why small firms/business survive

A
  1. Subcontracted by larger firms
  2. Provide niche goods and services
  3. Can avoid diseconomies of scale
  4. Lifestyle enterprises - not aiming to maximise
  5. Can be innovative and flexible to change in market
  6. Easy to sell online - no incurring cost
  7. Customer relationships
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2
Q

Benefits of large firms

A
  1. Efficiency - managerial economies lead to higher profit
  2. Increase monopoly power - lead to higher pricing, greater profit
  3. Able to influence - lobby government policy-markers
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3
Q

Benefits of large firm to customers

A
  1. Lower prices from economies of scale
  2. Large brands increase confidence
  3. Reduced ‘transaction costs” from not having to search for new suppliers
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4
Q

Benefits of large firm to employees

A
  1. Range of job opportunities and promotion
  2. Prestige from working in a large firm
  3. Greater access of non-financial benefits - lunch, gym
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5
Q

Benefits of large firm to suppliers

A
  1. Reduced risk from being selling to a firm less likely to fail
  2. Can lead to additional business for supplying a prestige firm
  3. Opportunity of knowledge transfer
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6
Q

Small firm advantage

A
  1. Innovative and flexible
  2. Can provide a niche good/service
  3. Too small to suffer diseconomies of scale
  4. Contract out to large firms
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7
Q

Large firm disadvantage

A
  1. Slow and bureaucratic to change
  2. May suffer diseconomies of scale from too large, AC rise
  3. Expensive to subcontract
  4. Mass-produced goods not always desirable
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8
Q

Why firm wants to expand and grow

A
  1. Economies of scale
  2. Build and sustain market
  3. Improve shareholder returns from higher operating profits
  4. Reduce risk of hostile takeover
  5. Pursuit of managerial objectives
  6. Synergy effect from having bigger sales platform
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9
Q

Definition of organic growth

A

Growth by increasing sales and output

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10
Q

Horizontal merger

A

Merged with another firm in the same industry, same stage of production/supply chain

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11
Q

Vertical merger definition

A

Two companies in different sectors of the economy joined together, in the same industry, along the supply chain

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12
Q

Conglomerate merger definition

A

Merger between firms that are unrelated in business

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13
Q

Vertical forward integration definition

A

Merger or takeover of a business further up the supply chain

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14
Q

Vertical integration forward advantages and disadvantages

A

AD:
1. Closer contact with the market
2. More profit (no middlemen)
3. Easier to moniter market trends
4. Makes life harder for competitors

DA:
1. Cost
2. Distribution cost
3. Need new skills

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15
Q

Vertical integration backwards advantages and disadvantages

A

AD:
1. Control supply chain
2. Get raw materials cheaper
3. Ensure stable supply

DA:
1. Less familiar area of operations
2. Reduced choice of supply

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16
Q

Horizontal merger advantage and disadvantages

A

AD:
1. Buying up competitors, reduced competition
2. Can become a market leader
3. Economies of scale from increased output
4. Increased market power over selling price

DA:
1. Diseconomies of scale - too large, inefficient and AC increase
2. Too much market power - targeted by CMA for anti-competition behaviour
3. Become lazy/less innovative due to less competition

17
Q

Conglomerate merger advantage and disadvantage

A

AD:
1. Spread risk
2. Can buy into growth area
3. Raises profile of business
4. Economies of scale

DA:
1. Unfamiliar market
2. Diseconomies of scale

18
Q

Organic growth advantage and disadvantage

A

AD:
1. Builds on existing strength
2. Less risk if failure - cheaper than merger
3. Can be financed through retained profits
4. Business retains its own “culture” and approach to doing business
5. Growth leads to economies of scale

DA:
1. Growth depends on market growth
2. Slow and shareholders may be dissatisfied
3. Franchising is risky, with quality issues
4. Fewer sources of finance available
5. Difficult to respond to changes in the market

19
Q

Principal agent problem

A

When interests of a company’s owners are not aligned with those of its managers

20
Q

3 ways of overcoming principal agents problem

A
  1. Align incentives - tie to company’s performance
  2. Increased transparency - mitigate asymmetry information between owners and agents
  3. Appointment independent directors
21
Q

What’s private sector

A

Operated and owned by private individuals and companies, for profit

22
Q

What’s public sector

A

Owned and run on behalf of the public, either by government, or by organisations funded by or report to government. Generally not for profit

23
Q

Profit and not-for profit

A

Not-for-profit run on commercial lines but has strong social welfare and environmental aims than to generate profit

Economics Year 2 (9 decks)

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